it is 3:00 p.m. on the east coast, noon on the west coast. this is your money. i'm ali velshi, we're following breaking developments on the fiscal cliff. we welcome our viewers in the united states and around the world. there has been a major snag in the negotiations toward a fiscal cliff deal with fewer than two days remaining on the countdown clock, dana bash is on capitol hill. tell us what the main point of contention is now. >> there are few according to sources in both parties. the biggest one when it comes to the democrats, from their point of view, is the fact that republicans in an offer that they made last night included what is known as chained cpi in laymen's terms and in terms that matter to many americans, it would effectively make social security checks lower each month. >> we learned this from sources earlier. the senate majority leader, harry reid went to the senate floor and talked about the snag. list ton what he said. >> the one thing i do want to

mention is that we're not going to have any social security cuts at this stage, that doesn't seem appropriate. we're open to just discussion about entitlement reforms, but we're going to have to take it in a different direction, the present status will not work. we're willing to make concessions as part of a balanced comprehensive agreement. but will not agree to cut social security. with 36 hours left until the country goes over the cliff, i remain hopeful, but realistic about the prospect of reaching a bipartisan agreement. at some point in the negotiating progress, it becomes obvious when the other side is intentionally demanding concessions they know the other side is not willing to make. we are not there, mr. president. >> right now, talks are at a standstill, they haven't been going on all day. but as we speak, you're looking at the senate floor, it's pretty empty, republicans and democrats are going into their own meeting

to hear a briefing behind closed doors from the republican and democratic leaders about exactly where things stand from their point of view. where the negotiations are, where the hang-ups are. the other according to sources in both parties, is what we've been talking about for weeks and weeks, which is those tax rates. republicans are saying they want to keep tax cuts in place for incomes above $400,000. democrats from their perspective they say they have moved away from one source i talked to, their comfort zone, $250,000. they moved up from that. they're not willing to go above 400,000. the bottom line, i think it goes without saying, this is not a good sign that things are so bad right now and they're not talking at this point when we're so close to what is a clear deadline. >> it's beyond that. it's obnoxious, it's -- >> it's unsulting to americans, it's insulting to the world. more than 500 days have gone by since they came to an agreement

that they would have to do something by now. it is quite remarkable that we are actually in this position. dana, excellent reporting, stand by there. i want to remind our viewers, two things that we're talking about here. the democrats had signaled that they might be able to use 400,000 as a threshold. the republicans had signaled they might be able to use $1 million as a threshold. but the speaker of the house, the top elected democrat in the country was not able to get a vote. he was not able to get even his own member support on the $1 million threshold. for now we don't know what the threshold is. for chain cpi, that's the consumer price index. and many benefits in the united states such as social security are, increased to that benefit. is calculated based on cpi. the way they calculate that is when a basket of goods increases or decreases in value. chain cpi would more follow consumer behavior. so if the price of meat were to go up. it may be that the average family then switches to chicken.

well, the consumer price index, the inflation calculation doesn't account for that possible switch. and that is why the discussion is going on about chained cpi it would mean when certain prices go up. you would make the assumption that people spend in a different way. and that is where the contention is. i want to bring in jessica yellin, our chief white house correspondent. jessica, we talked about chain cpi, this cake up a week ago and the president signaled he might think it's fair. in fact he said it again this morning on one of the sunday shows. that he might be okay with chained cpi. why has this become a point of contention over which the talks may be breaking down? >> because that was in the context of a much larger deal, ali, in which they were making much broader concessions, where democrats were getting more of what they wanted. republicans were conceding other points. that was in the context of a big deal with speaker boehner. now we're talking about the mini deal.

the patch to get us through the new year. so democrats argue that this doesn't even have the votes to pass the house and the senate as dana says, it's a quote poison pill in the eyes of the democrats. we can continue to discuss that. i just want to bring awe little bit of news, if i may. while this all is as you put it, i think in very clearly, quote, disgusting and everything is moving very slowly. there is one potential glimmer of light. and that is, that senate minority leader, of the republican, mitch mcconnell and vice president biden have spoken. they've spoken twice. and the two of them have a history of cutting deals together. they were able to cobble together the debt deal that got us through the debt negotiations and kept the country from defaulting back in the summer of 2011. does this mean it will happen again? no. but it at least means there is a line of communication open between democrats and senior democrat and republican and the possibility that who knows, maybe there could be a path

forward and this very late hour. ali, i'm not saying there will be. >> which is why nobody is saying we're done. nobody is saying this is over. you know, for the last few weeks, most people will recall that the conversations have been between president obama, at least the public ones, between president obama and john boehner. john bain certificate sort of sitting this one out. it's now harry reid, the senate majority leader, the democrat, and mitch mcconnell, the senate minority leader, the republican and joe biden has been brought in as the guy that you call if things are breaking down right now. so it's, there's an impasse, they're stuck. but something might still be happening. >> he's the master of the senate. he was there for 30-plus years, he knows how to cut a deal. and we heard senator mcconnell say on the floor of the senate, he's looking for a dance partner. i guess he thought senator reid wasn't it so now he's saying i'll try over here with vice president biden. i don't think that he's going get any further with vice president biden on this issue of cpi for example. the white house will not be any

more open to that than senator reid was. but if there is a way to get another route forward or if they're all just looking for an angle, maybe they can find another path this afternoon. who knows. >> thank you, jessica you're kind enough not to correct me. dy call john boehner the top elected democrat in the country. he's the top-elected republican in the country. jessica, thank you for that reporting. we'll be back to you in a few moments. in a few hours, in just a few hours, trading will open in some parts of the world for the final time this year. here's the problem -- they're going to be reacting to what's going on in washington. people around the globe are going to be watching what is happening in the united states with a wary eye, cnn international anchor jim clancy is with me now. jim, this is such a hyper-focused american problem and yet it's really a problem for the whole world. >> it definitely is. if mitch mcconnell is looking for a dance partner. the united states is the dance

partner for the entire world. the markets hate uncertainty what they hate even more is steering abject failure square in the face. those markets are going to open up in four or five hours' time we should see some limited reaction in asia. but perhaps not yet. it's still uncertain what is going to happen here. there's a huge stake. everyone realizes. europe has got its problems. germany starting to feel the effects of the global, of the downturn in europe. china, cutting its growth forecasts, india doing the same. the last thing anyone on the world stage needs right now is for the u.s. to start sliding back into recession. but you know, let's be clear here. that's, that would take some time. there would still be time for some kind of a deal. but it's the uncertainty that is really driving everybody's nerves in all of this. it's going to affect commodity prices in countries like brazil. countries like russia, everybody is in this together. waiting to see what happens up

there. >> you're absolutely right. we're going to be watching those international markets to see how everybody is reacting. it's this whole big chain, jim, thank you for that back home, the senate is still trying to work towards a deal as jessica just told us, senator harry reid earlier said that he is in fact hopeful about reaching a deal. listen. >> with 36 hours left until the country goes over the cliff, i remain hopeful but realistic about the prospects of reaching a bipartisan agreement. at some point in the negotiating process, it becomes obvious when the other side is intentionally demanding concessions they know the other side is not willing to make. we are not there, mr. president. so i hope that we are going to be able to go further. right now with the status of negotiations, we've are not where we can come forward and say we have this for you. >> the cnn contributor washington correspondent for the new yorker, he joins us on the

phone. i know you've been watching this closely with me for months now. >> is there a deal that you think can be reached before tomorrow night. >> we could be watching one of two things, alley. one of two extremes, we could be watching the collapse of deal right no front of our eyes here. >> and the public statements from mcconnell and reid are the beginning of the public contain to cast blame about whose fault it was if the deal collapses, or it could be the opposite. we could be watching the final negotiating, this could be the final public posturing to scare each side into giving in a few inches on the final issues and perhaps this is whal you need for the deal to be consummated later on today it could be one extreme or the other. >> the senators, both caucuses are meeting right now.

and we'll know a lot once that's over because the guys usually come out of those meetings and talk to the press and you know, each side will get a sense of what the respective caucuses are willing to do. harry reid's comments that you played earlier. it does not look like the democrats are going to budge on the chain cpi. they've publicly taken a stand against it. ironically on the same day where barack obama noted that he was in favor of perhaps agreeing to chain cpi as part of a bigger deal. so from what i can tell, the chain cpi is off the table for democrats. if that's not enough for the -- if that's a must-have for the republicans, then we're not going to have a deal. >> i'm going to interrupt you,

we're going to keep tracking this story together. coming up next, a man you're not seeing on tv, he's playing in the background. he may be the most feared man in washington and he doesn't even hold office. >> if i went and became a tibetan monk on the top of some mountain somewhere, the american people would still, they were against tax increases long before i was born. the whole tea party thing predates me. grover norquist on the fiscal cliff showdown and why politicians won't back down from signing his anti-tax pledge. so i switched my car insurance to state farm...

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yes, me totally. what? why don't you tackle the next quarter. you eat yet? polynesian? pu pu platter? yup! keep up the good work. i will keep up the good work. do more with the new samsung galaxy note ii. the fiscal cliff is a battle of ideological will, some americans feel strongly that increasing taxes on anybody hurts the economy. it's quite possible that's true. the central question is whether it will hurt that much to raise incox taxes a little bit on the highest part of the highest earners in the country. to push the country to the edge of a recession over this is quite irresponsible. the increase in taxes will hardly affect the economy. but you know, that's my opinion. my opinion should count as much as anyone else's. the problem is in washington, one person's opinion carries disproportionate weight. that person is grover norquist, the head of americans for tax

reform. a group that's got a pledge that most members of the republican congress signed saying they won't raise taxes under any circumstances. i spoke to norquist after friday and asked him about taxes and almost relimgous belief that tax increases, any tax increase is bad for the economy. >> we've seen that whenever you raise the capital gains tax. the top margins tax, tax increases distract from what the country needs to do. we need to deal with our run-away government spending, the government is spending too much money. tax increases are not part of cutting the budget. tax increases are what politicians do instead of reforming government. as long as tax increases are on the table, the politicians never even think about reforming government. >> i understand you've been on this fight for a long time and you've been devoted to the whole idea of not seeing taxes increase anywhere. what we're down to is largely a political battle over the increase in marginal tax rates based on what you earn. i understand there's a lot more

to this puzzle. but on that front, because that's the one that gets most of the ink around here. it's the whether people who earn more than 250,000 or 2z 400,000 or a million should pay more tax. the point i'm trying to get at is that's not going to hurt the economy. that's all we're talking about. paying 4.6 percentage points higher on your income over 250,000, the evidence isn't there that that's going to hurt the economy. >> it will take taxes from 35% to 43.6%. because you have to add both the obama care tax that's coming and the tax, the disappearing bush tax increase and this hits primarily as you know, small business owners and people who file subchapter s corporations. >> that's not who is primarily hits, it hits some of those people. >> over half of all the small business income that ends up paying this higher rate, if you do it. and the last time we did this, more than two-thirds of the

people who got hit, were actually the subchapter s corporation. i think it would have a very significant effect. the other effect it has is that we're not cutting spending because we're spending too much money. and that sends a very bad signal. if we're not going to do entitlement reform, because every time we talk about it obama says let's raise taxes instead. we're dealing with tens of trillions of dollars in unfunded liabilities, in four years obama has done nothing on entitlement reform. nothing for four years. what has he done? chirped about raising taxes on rich people. raising taxes on rich people is what obama talks about instead of doing his job. there are two costs to this. one, if you take money out of savings and investment, which is what you're doing with this, it doesn't help, it reduces the incentives to save, invest and work and the other thing you do

is you never get to reform government entitlements. >> that's not causal. >> it is, absolutely. >> that's not really. >> you live in new york i live in d.c., washington, this is all causal. the reason he's talking about tax increases is to avoid the conversation and dealing with spending restraints. that's why obama does what he does. >> the reason i doubt that, grover, is because we've all done the math and we all absolutely agree on the math that you can't get out of the deficit hole we're in by taxing rich people even if you tax them at 100%. everybody know knows that. so when republicans say we don't have a tax problem, we have a spending problem, the fact is we've got both and we can deal with that. you gave your blessing to the proposal that john boehner put together and so many congressional republicans are scared for voting for something that feels like looks like, a tax increase because they're worried that your organization will come back to haunt them. they signed a pledge, you gave your blessing and they still couldn't get the votes on the

floor. what's up with that? why did that not happen? a week ago i was hopeful we might have a deal. >> because the pledge is not to me, it's the american people. it's the people of the state that any congressman or senator is from. they have to feel that they can go to their constituents and say -- i voted against all efforts to raise taxes. i argued having read the boehner plan, it was silent on taxing people that make more than 1 million. it made permanent as opposed to obama who wants to protect you for a year. he made permanent the tax cuts for people who made less than $250,000 a year, actually $1 million a year. and as a result it was a giant step towards protecting all taxpayers. and the republicans held the two tools they need to protect all taxpayers and to reform spending. and that's the debt ceiling increase where they can demand

things in return for obama needing a debt ceiling increase, since he's planning on driving debt up another $8 trillion the next decade and the continuing resolution because the democrats in the senate don't pass budgets any more. we do a continuing resolution. those two tools can help you both cut spending and deal with further tax reform. those weren't given up, the budget, you know, not everybody liked plan b. we didn't endorse it. but it didn't violate the plan, a lot of republicans could go with it. >> you gave him cover to be able to vote for it and say grover is not mad at me for voting for this. i want to ask you -- >> it sounds terribly reasonable. >> you do come and talk to us about it, which we appreciate. >> you say it's not a pledge to you, it's a pledge to constituents, but constituents don't have the money that you have to go out and actually do something if somebody breaks that pledge. there are many congressmen who have done things wrong. they've said to their tichs they'll do something and their

constituents throw them out of office if they don't do what they said. this is different. because if you break this pledge to your constituents, grover norquist comes after you, not necessarily your constituents. >> well, george herbert walker bush, bush xli broke the pledge. americans for tax reform didn't spend money attacking him. bill clinton ran ads attacking him for breaking his pledge. since the pledge is a public piece of information the press goes after you if you break the pledge. your local voters go after you. your democratic opponent calls you a fibber. the pledge is self-enforcing. if i went and became a tibetan monk on the top of some mountain somewhere, the american people were against tax increases long before i was born. the whole tea party thing predates me. so harry reid misunderstands, the american people don't want taxes raised. they realize that spending is the problem, spending needs to

come down. tax increases get in the way of spending restraight. >> i want to bring stephen moore back into the conversation. a lot of people don't like grover norquist you've defended him. you come from the same place in a lot of things. here's where i take issue. he said increasing taxes avoids the conversation on having the spending discussion. i said i don't think that's causal. i think we can agree we're not having a robust-enough conversation on how to deal with spending in this country and how to make government more efficient. is it a fact by raising taxes we're just not going to have that discussion? >> yeah, i believe so. i believe every time you raise taxes it reduces the pressure to cut spending and i agree with grover on that i want to take issue on one thing you said to grover that i think is a little unfair. the vote we had last week, the job boehner plan b, which actually there was no vote -- >> you know, you've been saying,

these guys are just following the instructions of grover nor quest. look, i actually think republicans made a mistake personally in not approving plan b. but you know, the people voted against it are the ones who said they were going to vote against. about 50 house republicans. this was not because they were afraid of voters, it was truly, ni in my opinion, a vote of conscience, they didn't want to take a vote on something they thought would hurt the economy. >> i don't take issue with. i'm glad you point that out. i have a lot of people on twitter saying why do you have stephen moore and grover norquist on, because soum of you believe it's an issue. >> 51-48, barack obama barack obama won by three percentage points. this is a divided country. >> that does not absolve anyone of the business of getting this done. >> i agree. i want a resolution here. think actually there's room for i think there will be some kind

of bargain in the next couple days or next few weeks then we move on to these bigger issues that you've been talking about. >> let us hope. >> one last point if i may. whether we improve these tax increases for the rich or not, is you know, you've said this yourself. we still have a trillion-dollar deficit. we've got a lot of work to do. >> we do have a lot of work to do all i ask is we get the work down. stephen moore, always a pleasure to talk to you. we'll be talking a lot in 2013. coming up, the great tax debate that stephen was just talking about. does raising tax on the wealthy really hurt the economy? i'll give you an answer after this.

the biggest issue in all the fiscal cliff wrangling is taxes. it's not the most important issue, but it's the central one. grover norquist told you his strong opposition to any tax increases of any sort. many republicans share his view. let's look at the economy. obviously across the board tax increases would hurt the economy. but what will the real economic reaction be to small tax increases on the wealthiest americans? now, annie lowrie of the "new york times" is still with us. i always have to make sure my viewers understand i am not advocating for tax increases on the rich. i want to explain what could happen. i want to bring in jean zahadi, a senior writer at your money and kevin haslett of the american enterprise institute. he was the author of much of mitt romney's economic policies.

a good friend of the show. jean, let me start with you. tax increases on people making more than 250,000 a year. let's use that as a number. it might be 400,000, it might be half a million. it might be a million. let's take $250,000. if you increase taxes, the marge nalt tax rate from 35% to 39.6% on that group of people, does it hurt the economy? >> i'm going to use estimates from the congressional budget office. a nonpartisan score keeper for congress. they found if you let the bush tax cuts on higher earners, it would boost the economy almost as much as if you let everybody's bush tax cuts stay in place. there's little difference on how much would you help the economy if you let the bush tax cuts stay in place for everyone or for most people. in that sense it sounds like it wouldn't have a huge effect on the economic recovery. having said that i think if you asked most economists and tax experts, all things being equal is it better to have lower rates

or higher rates, they would say probably better to have lower rates. all things aren't equal. there is no objective level of what is too high and there are different factors of what goes into economic growth it would depend on whales congress does with its tax and spend policies. it's not just the -- >> you sort of backed into this and said you're answering my question in the reverse, by saying it's not clear that increasing the taxes on that small portion of people would have much of an impact on the economy. let me take it to kevin haslett. do you agree? >> i think going from 35 to 39.6, it does depend on what else is going on that rate change alone isn't the biggest thing in the world there was a survey of a bunch of tax economists i cite a lot in congressional testimony and elsewhere that found if you had a big fundamental tax reform you ought to be able to get an extra percent a year out of growth. the tax increase would be the opposite of tax reform. it would have an opposite effect. it would be negative for sure. but it certainly wouldn't be as

big as 1% a year, i would guess. it would be smaller than that. so if we have external shocks, if fracking takes off and the economy starts to boom, and if we go up to 39.6, we could still have a good year. i don't think anyone disputes the effect is negative. minus .2% or minus .8%, that's probably the range we're talking. >> you're always so good to us. you always say nice things about canada when talking about taxes. you mentioned a study, one of the more comprehensive studies of the effect of tax increases on the economy. done with christine roemer. not someone you share a lot of ideological ground with. she had done a study, i asked her directly, what is the effect of increasing taxes you know on the economy. here's what she told me. >> it's clearly a matter of timing. so what our paper showed is that tax changes, both up and down do

have a powerful economic on the economy and if you raise taxes in the short-term, it will tend to lower output. even though i support raising taxes for dealing with the deficit gradually over time, now is not the time to do it. >> now is not the time to do it. that was a year ago. the recovery still chugging along. we got an okay economy, it's not blowing the lights out, but it's okay. even with a deal taxes on the wealthiest americans are likely to go up. what's your take on that? >> yeah, i think if you look a year ago for instance, the white house was pushing really hard for this extension of the payroll tax cut which hits everybody who earns a wage. it hits low incox families a little harder than high incox families. that's going to hurt the economy probably more than an increase on taxes on the wealthy would. just do go back to a point that grover was making before. it's important to note that if you're making $250,000 a year, your taxes are going to go up by something like a dime.

it's really people making ha lot more money than that and what whatever changes happen to the tax cuts currently in place for investment income thaw need to look at. i think there's a sense that having taxes increase on the wealthy is the least harmful way to go about raising revenue. >> and to be fair, it's not the most complete way of fixing our deficit or our debt crisis, we've all sort of done the math on this it's going to account for some amount of money, not insignificant, but it's not going to be the way we can get there. when grover makes the argument that raising taxes, means we don't have to deal with spending, that's not true, we have to deal with spending. >> even progressive folks on the left who would strongly prefer tax increases on the the wealthy to cuts on programs for the poor, would argue that raising taxes on just the rich at some point is not going to do it. if you're going to have the level of spending that they're recommending we have. it's by and complicated. even if we get the cliff solved.

there's going to be an argument for years in congress about how to restructure the tax code. >> i think your characterization going to go down in history. it's a big complicated thing. thanks very much for that. coming up next, the u.s. economy is on the verge of taking off. but the fiscal cliff mess could get in the way. how much could eexpect in 2013 with a deal or without a deal. well, i guess i can double check... my watch! [ male announcer ] it pays to double check, with state farm. so, the 5.3-liter v8 silverado can tow up to 9,600 pounds? 315 horsepower. what's that in reindeer-power? [ laughs ] [ pencil scratches ] [ male announcer ] chevy's giving more. now through january 2nd, no monthly payments until spring for qualified buyers. get the silverado for 0% apr financing for 60 months

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welcome back to "your money," we welcome our viewers here in the united states and around the world. breaking news on the fiscal cliff. there's been a significant snag in the negotiations with just fewer than two days remaining to go. about 36 hours remaining on the countdown clock. dana bash is on capitol hill with latest. dana, what have you got? >> this kbifs you a good sense of where things stand. they're at a standstill. you see a lot of reporters milling around. it's behind this wall that you can't see. the democrats, all senate democrats are meeting now, getting a briefing from the senate democratic leader, harry reid and down this haul, which you can't see from here, the same thing is going on with republicans. at the podium we hope to hear from senate majority leader, harry reid. in terms of where things stand, they're frozens it goes.

earlier today, we explained that the reason from the democrats point of view is that they got an offer from republicans that includes what was known as chained cpi, which you've been explaining means social security checks would be smaller for social security recipients, which is something that is a nonstarter for democrats in this particular negotiation. it is something that the president offered as part of a larger deal. there are other things that are not together on like tax rates and other big issues. but that is one major snag as far as democrats are concerned and that's why the senate majority leader on the senate floor a little while ago said he won't give republicans a counteroffer because that's off the table. we'll see what happens in these talks, perhaps on the republican side. the senate minority leader is going to hear from his rank and file this something they can give in on and from the

democratic side, there are other things they can give on. but it does not feel like this is a deal in the making right here. i don't get the feel at all. there's another thing we haven't talked about. but perhaps you will with other guests which is the sequester. $110 billion in spending cuts, that's something that republicans want to keep. democrats don't. >> all right, dana, thanks very much. we'll check in with you shortly. let's go to john avalon. the senior political columnist for "the daily beast." 500 some odd days since they first knew we were going to face this reality. that the fiscal cliff was going to come to pass. this is about the most anticipated economic disaster the world has ever seen. >> it's absolutely pathetic that we're here, just hours before the end of the year and we're now negotiations are at an impas impasse, it's the divided dysfunctional congress at a new low. we all knew that the grand bargain which we've been talking about and debating which would need a genuine entitlement

spending reform. revenue increases, we're trying to put a patch not to go over the cliff. which would be a kick in the teeth to the economy as we're starting to recover. putting chained cpi on the table. the president spoke about it on "meet the press." in the context of a larger grand bargain. the fact that the two sides seem blocked and back-channeling between mcconnell and biden, that's not a good sign for the country. we're hours away from the cliff here and there seems to be a stalemate in washington. >> what do you think happens, do they cut a deal or are they just trying to figure out who gets the blame if america goes over the cliff? >> they should all get the blame. polls show that republican obstruction would get the brunt in the near term. the problem is this isn't just a political problem. this is an economic problem. the combined pack could take the economy and put it back in recession. this is no joke. it's not just that all

americans' taxes would go up overnight. the real absurdity. both parties and the president are in agreement on 98% of the taxes. they're in agreement that 98% of americans should not see their taxes raised. the debate is over 2%. and additional things like extending unemployment insurance. the question is what kind of a concrete proposal. we should be able to come together as a base line. as a foundation for deal with the really difficult stuff going forward. the debt ceiling out there. we know we're going to need a larger plan, but it's not going to get done in the next 36 hours. >> any hopes of that happening are over at least for now. john ofavalon, thanks very much. jessica yellin has new information about communication between the white house and the senate's top republican minority leader, mitch mcconnell, jessica? >> well, what i can report is that mcconnell and the vice

president have been in contact. they've spoken twice at least and this is at least some encouraging news, i know dana has the best pulse on the mood and if she is saying it does not look encouraging she really would know. but at the same time the fact that these two men are at least in contact creates the possibility of a way forward. what we could see potentially is some bartering. one thing we know republicans want is a way to get the estate tax for example from jumping up in the new year. >> if they put the cpi on the table as a a way to get the estate tax rain reigned in, may that's something that the vice president could get in there and start bartering with. i'm not speaking here from actual information about what the vice president is doing. >> but you've got a lot of contacts.

>> our viewers around the world, the chained cpi, the inflation measure we use to adjust benefit checks including social security and what the republicans are proposing is that it reflect how people would behave. so often when the price of meat goes up, people switch to chicken. this is something the white house has said they're willing to entertain. as you mentioned, they would do it in the context a bigger deal. not the deal that they're talking about right now. jessica we'll come back and keep checking in to see what the developments are. the circus in washington has real implications for your money and your investments, when we come back, we'll talk about how to protect your money as american lawmakers try to work out a deal. you are watching your money on cnn. [ male announcer ] it's that time of year again. time for citi price rewind. because your daughter really wants that pink castle thing. and you really don't want to pay more than you have to. only citi price rewind automatically searches for the lowest price. and if it finds one, you get refunded the difference. just use your citi card

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. if lawmakers fail to avert the fiscal cliff or come up with some sort of compromise, the u.s. economy is likely to contract by who knows how much next year. unemployment could rise to 9% in 2014. according to standard and poors, the rating agency, they said on friday that is unlikely that the fiscal cliff gridlock could spark an additional grown grade of the country's credit rating

in august of 2011, s&p downgraded the u.s. credit rating from aaa to aa plus citing an ineffective and unplea ticketable governance. the consequences for going over the clip could be far more severe than a credit downgrade actually would be. we could easily fall into another recession and we know what that can do to your investment portfolio. jim awod is managing editor of. egan jones independent rating agency that is not paid by the corporate issuers than it rates. shawn, your firm was quick to downgrade the u.s. credit rating last year if we go over the cliff or lawmakers reach some sort of watered-down compromise, will you downgrade america again? >> no, our take on it is that it's a very positive sign that the government is wrestling with the immediate problem of the budget deficit. it was $1.4 trillion last year. it's probably going to come in

at about $1.2 for the current year. so we view this whole wrangling as a positive it's the first step to solving a problem is recognizing it. most people are recognizing the immediate problem of the federal budget deficit. >> that's a remarkably glass half full view of the world shawn. i appreciate that. let me take a look at world borrowing costs. this is gauge of how investors feel about a given country. sorn debt so if you're going to buy bonds of a country. a ten-year bond yield, 1.7%. switzerland, which doesn't have enough bonds to make a difference is about .5%. portugal at 7 and italy at 4.5. the point is that whether or not you or s&p or anybody else downgrades the united states is there a danger that it becomes substantially more expensive for the u.s. to borrow money any time in the future? >>. >> a lot of the borrowing costs have been masked by the

purchases by the federal reserve bank, they purchase about 75% of what the treasury has issued over the past year. the bigger challenge for a lot of institutional investors with regard to the credit quality of the u.s. is entitlement reform. the unfunded liabilities are in the area of $100 trillion. depending on what type of interest rate or discount rate you use for the future liabilities. >> that's something that we have some time to address. more important than the immediate deficit reduction for a lot of institutional investors, including ourselves. >> i'm going to take it over to jim for a second. jim your firm manages money for individual and institutional investors. what have they been doing ahead of the fiscal cliff. >> good long-term investors have investors have been keeping their eye on the long-term ball, which is that you have an investment goal, you have an

asset allocation, you have an asset allocation, and you keep rebalancing what we're advising people is keep rebalancing against your asset allocation. if stocks go down you buy a little bit more, if they go up, you might want to take a little money off the table. what we're advising people is ignore the headlines in the fiscal cliff. they're going to resolve themselves one way or the other. and keep to your long-term asset allocation goal. and the biggest percent of that should be in large-cap multinational u.s. equities because they have better balance sheets than the u.s. government, higher dividend yields than the treasury pays or the corporate bonds pay, and over the long-term, which is how people should think, they're going to grow earnings and dividends. so i would say pay attention to the headlines because they can affect the short-term, but don't act on the basis of the headlines. don't make an investment decision today based on what you think might happen on monday or wednesday with the fiscal cliff. >> i want to talk to you both about this more.

as we go to commercial break because we have to pay our bills, the s&p over the last five years, you want to pull back and take a look at that. coming up next, how to protect your money. 2013 no matter happens in washington this weekend or on monday. this is $100,000.

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back with jim awad,managing director of zephyr management, sean egan, founder of egan jones, an independent ratings agency. sean, i know you deal in ratings. i want to show viewers what the s&p 500 which may look like a lot of their own investments and 401(k)s looked like for five years. here's what it's looked like over the last year. we're up about 12, 13%. that may all change on monday, depending on what happens. the stock market is saying america's okay. what are the bond markets saying? >> the bond markets are also saying the -- that conditions are okay. however, there's a caveat, however. and that is the significant amount of money printing that has taken place not only in the u.s. but in fact, in every developed country from the uk, the european union and japan. >> and just to interrupt you, sean, that's probably why everybody says all of this money printing will lead to inflation. one of the reasons it hasn't really is because everybody's doing it. >> there's that reason and there's the underutilization, both in terms of the employment and also in terms of planned capacity.

in fact, there are two different views of the investment universe under the current conditions. one is that all this money printing is masking miserable underlying conditions, that real wages haven't increased very much and the economy is in terrific shape. the other view is that the economy is okay and that this additional money printing will result in risk assets increasing in value. and you know, people in our shop, some people have the one view, other people have the other view. it's very interesting. we're in unusual times when additional research will go a long way in pointing out the mine fields. that's where we spend our time. >> that's where you do spend your time. you're independent, not paid by the people who you rate which gives you a credible voice. jim, for folks going out of the weekend into monday morning, they're worried maybe they don't see a deal. do you do anything with your

investments? >> no, not in anticipation of a deal. what i would say strongly is if we don't have a deal and we go over the cliff and markets act negatively next week, you want to be a buyer of stocks for the intermediate and longer term. your only hope in this low pays nothing, bonds pay nothing, we don't know what the dollar will be worth or where treasuries will be in a few years, your only hope is to hope growth of earnings and dividends. that's what you get in large cap multinational companies with good balance sheets that you only hope to accumulate capital over time if you're a young person with a 401(k) and trying to plan for retirement. >> okay. both of you agree. it's uncertain but don't panic. sean, jim, great to have you both on the show. we're taking a quick break. when we come back, more of "your money."si usps.com pay, print, and have it picked up for free. any time of year. ♪

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